If you’re considering filing bankruptcy, try to avoid using credit cards to finance the holidays. But if you do, there are some extra risks.
Using Credit Shortly Before Filing Bankruptcy
Using credit during the holidays if you’re contemplating bankruptcy is dangerous. It could be considered fraud if you run up debt that you don’t intend to honor.
What is “Fraud” in Bankruptcy?
The bankruptcy system rewards honesty. One of the core principles in bankruptcy is that debts which are entered into honestly can later be written off, while debts entered into through cheating cannot.
When you incur a debt, you are agreeing to pay the debt. If at the time you are incurring a debt you actually don’t intend to pay it, that would be cheating. Falsely saying or implying that you intend to pay the debt would be a misrepresentation and likely a fraud. There is a risk that such a debt would not be written off (“discharged”) in bankruptcy.
Charging on a Credit Card
Credit card debts are usually discharged without any problem in bankruptcy. But if you made a misrepresentation to a creditor in order to get the credit card in the first place, or used the card without intending to pay for those purchases, that creditor could challenge your ability to get its debt discharged.
Using false information to get a new credit card account is relatively rare. It’s not hard to understand that doing so is wrong, that it’s behavior that shouldn’t be rewarded by the discharge of that debt.
But for various reasons buying something on a credit card even when you’re considering bankruptcy, seems different, because:
Your actual intention at the time you make the purchase could genuinely be quite vague—maybe you’ve not actually decided to file bankruptcy, are hoping to pay the debt, but are feeling pretty hopeless about ever being able to.
You figure the particular purchase is relatively small, so one way or the other it’s not a big deal.
You may be using the credit card by force of habit, and not even thinking much about whether you can pay it.
You may be quite desperate, very much needing to make the purchase regardless of your ability to eventually pay for it.
For these kinds of reasons it’s not uncommon for people to use credit cards not long before filing bankruptcy. And although creditors don’t always object in these situations, they do so probably more than in any other kind of “fraud” situation.
What’s a “Presumption of Fraud”?
One of the reasons that creditors are more prone to object to the discharge of recent credit card charges is that bankruptcy law helps them do so. The law does so through a “presumption of fraud” for “luxury” purchases.
Bankruptcy law accepts the reality that it’s not easy for a creditor to determine your intent at the moment you make a purchase. It’s often not easy to prove in court that you didn’t intend to pay a debt at that point.
So the law gives the creditors an advantage. Under certain very specific circumstances involving the timing and amount of the purchase, the law will presume that you made a purchase without intending to pay for it. The creditor doesn’t necessarily need to establish through evidence what your actual intent at the time was.
What’s the “Luxury” Presumption of Fraud?
Specifically, if you buy more than $650 in “luxury goods or services” from any single creditor during the 90-day period before your bankruptcy is filed, that debt is presumed to not be discharged. The presumption applies not to the entire balance of the debt but only that part incurred during that 90-day period.
Be careful because “luxury” is defined much more broadly than normal—“luxury goods and services” includes everything other than those “reasonably necessary for the support or maintenance of the debtor or a dependent.” That could include virtually anything that isn’t an absolute necessity.
The Presumption Can Be “Rebutted”
Once the creditor “raises the presumption” by alleging the necessary facts to fit within the presumption, you can respond by “rebutting the presumption.” The presumption is only a presumption, it’s not proof. The creditor can win with only the presumption of fraud if you don’t push back. But if you do have the right facts you can defeat the presumption and not have to pay the debt.
So if you made a purchase or purchases exceeding $650 within the 90 days and the creditor complains about it to the bankruptcy court, if you in fact HAD intended to pay the debt at the time you made the purchase you would respond to the court about your honest intent. You and your attorney do this through your own direct testimony about your intent and/or by establishing other relevant facts, such as what happened in your financial life after you made the purchase(s) which subsequently convinced you to file bankruptcy.
The Debt is Discharged Unless the Creditor Complains
Even if the timing and dollar amount would mean that one of the presumptions would apply, that debt is still discharged if the creditor does not make a formal complaint about it. This is true no matter how good or bad your intention was at the time you made the purchase(s). The reality is that creditors often don’t bother complaining, usually because the amount at issue is too small to justify them incurring more expenses to make you pay it.
The creditor’s complaint must be made on time. The deadline for creditors to complain is a quick one—60 days after your “meeting of creditors”—so usually within about three months after your case is filed. After this deadline passes the creditors can no longer raise objections, so at that point you no long need to be concerned about it.
Fraud Can Be Proved Without the Presumptions
Don’t assume that purchases that you make earlier than this 90-day period necessarily mean a creditor could still complain. The presumptions just give the creditors a procedural advantage. But they are free to try to prove a misrepresentation or fraud no matter when it happened.
For example, if someone paid for an $8,000 vacation cruise on a credit card, and then filed a bankruptcy case 91 days later, the 90-day presumption of fraud wouldn’t apply. But the creditor would nevertheless likely be able to put together evidence to convince a bankruptcy judge that more likely than not that the person didn’t intend to pay that new $8,000 debt. If the person didn’t make a single payment on the account after that $8,000 charge, was already insolvent before making that charge, and didn’t experience any new financial setbacks between then and filing bankruptcy 91 days later, these could potentially be enough circumstantial evidence that the person was not expecting to pay for that cruise.
During the Holidays
So if you can, avoid using credit if you are considering bankruptcy. For the same reasons you should not finance the holidays on whatever credit you may have available. Doing so can result in the new debt not being written off when you do file a bankruptcy case, or may affect its timing.
But in any event, and especially if you’ve already used credit recently, see a bankruptcy attorney as soon as you can to determine what’s in your best interest. You’ll learn what you do and don’t need to be concerned about, and how to best posture and time the filing of your bankruptcy case to meet your needs.